By John Chionchio, Partner — WealthPoint Business Advisory Services
If you’re a successful business owner, one of the most important financial decisions you’ll make is how to turn the value you’ve created into the future you want.
And there’s a powerful relationship between three things:
TIME. OPTIONS. OUTCOMES.
The more time you give yourself, the more options you can preserve.
And generally, the more options you have, the better your outcomes will be.
That’s why understanding an ESOP should happen years before you’re ready to exit.
What Is an ESOP?
An Employee Stock Ownership Plan, or ESOP, is a qualified retirement plan designed to hold company stock for the benefit of eligible employees.
In a typical transaction, an ESOP trust purchases shares of your company. Employees become beneficiaries of the trust and accumulate an ownership interest through their ESOP accounts. They have an account that accumulates shares, not dollars, and unlike their 401(k), they contribute none of their own money to the plan.
But here’s what makes an ESOP particularly interesting to a business owner:
Ownership is separated from control over the operation of the business. This control gives sellers the flexibility to create the outcomes they want for their people, for the future of the business, and for their own highly personal succession and eventual exit process.
The ESOP can become the owner of a significant portion—or all—of the company while the board runs the company. And, the sellers create the board, maintaining control.
Your employees aren’t actually shareholders. They don’t take over the company. They are simply beneficiaries of a trust.
That separation can create possibilities that simply don’t exist in other monetization strategies.
Why Does That Matter?
Consider what you’re really trying to accomplish when you exit.
Maybe you want a higher monetization than you’ll get from a financial third-party sale.
Maybe you want to continue leading the business for a period of time.
Maybe you want to protect your employees.
Maybe preserving the culture you’ve spent decades creating matters deeply to you.
Maybe you want the company to remain independent.
An ESOP can address all of those objectives simultaneously.
And that’s where the concept of time becomes so important.
If you wait until you’re ready to leave, you may have very few choices.
But if you begin exploring your alternatives years earlier, you can evaluate an ESOP alongside other monetization and succession strategies—and determine which path produces the best outcome for you, your family, your employees and your legacy.
Three ESOP Advantages
Tax Efficiency
For qualifying companies, ESOP ownership can create significant tax advantages. For example, a qualifying S corporation that is wholly owned by an ESOP can generally avoid federal and most states income tax, because it’s owned by an exempt entity – The ESOP Trust.
That can leave substantially more capital inside the business.
A Future for the People Who Built It
Employees participate financially in the future success of the company through their ESOP accounts. As company value increases, so does the value of their shares, usually far more rapidly than their market-based 401(k) accounts.
Legacy – You can be the architect of the business’s future, as you have been of its past, even after you don’t own it anymore. For many owners, that can be profound.
The Bigger Lesson
An ESOP isn’t right for every company.
But not knowing whether it’s right for your company can be costly.
There are many ways to monetize or transition a privately held business. An ESOP is one of them.
The sooner you understand those alternatives, the more time you have to improve the business, evaluate the alternatives, structure a transaction and pursue the outcomes you actually want.
More time preserves more options.
More options create more opportunities for better outcomes.
And when it comes to something as important as your life’s work, that’s a pretty compelling reason to start early.
Don’t wait until you’re ready to exit to discover what your options were. It all starts with a Feasibility Analysis.
This is Episode 1 of 12 in my Little Known ESOP Exit Strategy Secrets series.
In the next episode, we’ll answer:
“ESOP Feasibility — Is This Really an Option for My Business?”
If you’re a business owner who believes your exit may be 3–10 years away, now is the time to start exploring the possibilities.
Contact me at johnc@wealthpoint.net.
You can’t predict everything that will happen between now and your exit. But with enough time, you can preserve your options—and give yourself a much better chance of achieving the outcomes you want.
